Presentation on theme: "October 9, 2013 Optimizing Your Exit Event. Housekeeping »Everyone is on mute. »IMPORTANT – For the best quality audio, try using your telephone and not."— Presentation transcript:
Housekeeping »Everyone is on mute. »IMPORTANT – For the best quality audio, try using your telephone and not your computer’s microphone. »Type your questions in the question box, and we will address them at the end of the call. »Please “be present” today, pretend we are in a classroom together. »Please take the one question survey when leaving the presentation.
Presenter’s Background Scott Osborne, founder and Managing Principal of Osborne HomeCare Group
BEGIN WITH END IN MIND »WHO will likely acquire my firm? »WHAT will the likely purchase price & deal structure be? »WHEN will I receive the proceeds? »HOW much of the proceeds do I get to keep?
WHY IT MATTERS? Investment Return = Owner Income + Capital Gain ($000)Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9 Year 10Total Owner Income($100)$0$50$100$200$225$250$275$300$400$1,700 Sale$0 $1,500 Taxes$0 ($15)($30)($60)($68)($75)($83)($90)($345)($765) Net Proceeds($100)$0$35$70$140$158$175$193$210$1,555$2,435 In this example, Capital Gain is almost half of the post-tax investment return
Who, WHAT, When, How »Quantify Owner Income –EBITDA + owner compensation & benefits + non-recurring items + non-essential items »Qualify Transferability & Sustainability –Perceived risk = required rate of return –Headwinds include a) ACA b) exemption repeal c) increased income tax rates
Who, WHAT, When, How cont. »Example: Owner Income Margins of 15% on Annual Revenue of $2,000,000 = $300,00 –Equity Injection (20%): $200,000 (includes assumed client service deposits) –Retained Working Capital: 70,000 (half a month of expenses)
Who, WHAT, When, How cont. –Bank Loan (70%): 700,000 –Cash @ Close (90%): $970,000 –Seller Note (10%): 100,000 Total Deal: $1,070,000 (3.57 multiple)
Who, What, WHEN, How »Seller Note average term = five years »Example: $100,000 Seller Note –Seven percent (7%) accrued, simple interest during two-year “standby” period –$114,000 principle amortized over ten years payable in three years –36 monthly payments of $1,323 – final “balloon” payment of $87,700
Who, What, WHEN, How cont. »Seller Note Benefits –Attractive interest rate –Tax deferral to lower income years –Increase potential pool of prospective buyers »Seller Note Risks –Non-payment
Who, What, When, HOW Two net proceeds considerations include; » Tax impact –Organization –Purchase Price Allocation »Seller Note Structure –Contingency –Security
OPTIMIZATION TACTICS 1. Begin a Sale Preparation Process at least three years prior to going to market. 2. Assemble your exit team: transaction attorney, tax accountant, mergers & acquisitions intermediary, financial point person. 3. Ensure financial statements are prepared on an accrual basis and reviewed quarterly by a CPA.
OPTIMIZATION TACTICS cont. 4. Scrutinize questionable deductions/expenses and if in doubt, take them out. 5. Identify key staffers and develop business protection and retention strategies. 6. Transition mission critical activities to staff that will remain post-sale. 7. Conduct a legal review.
Situation: The Capital Gain achieved from the sale of a home care firm is a major contributor to the overall investment return.
Solution: Optimizing Your Exit Payday involves knowing what you don’t know, building the right exit team, and prioritizing the necessary planning & preparation.
Regulatory Headwind’s Impact On Home Care Deal Value »Deal Value 1 = 3 year historical cash flows X a risk adjusted multiple. »Deal Value 2 = 3 year projected cash flows X a risk adjusted discount rate. –The commonality is a risk assessment. –Risk is in the eye of the beholder.
Regulatory Headwind’s Impact On Home Care Deal Value cont. Risk Assessment Risk RatingMultiple RangeDiscount Rate Range High2.0 – 2.9930% - 35% Moderate3.0 – 3.9925% - 29% Low4.0 – 5.020% - 24% Sophisticated buyers seek a rate of return commensurate with the risk.
Risk Factors »Risk is the perceived transferability, sustainability and predictability of cash flow. »Cash flow volatility and uncertainty adds risk and detracts from value. 1.Management Continuity 2.Client Diversification 3.Payer Source Diversification 4.Referral Source Diversification 5.Cost of Care Trends o Regulatory headwinds negatively impact cost of care.
Regulation That Jeopardizes Cost of Care »Work versus welfare expected to perpetuate caregiver shortage. –Welfare currently pays more than a minimum wage job in 35 states. –In 13 states it pays more than $15/hour. »The Affordable Care Act is expected to undermine the 40 hour work week and add staffing complexity.
Regulation That Jeopardizes Cost of Care cont. »Companion Care Exemption repeal expected to undermine around-the-clock care affordability and add staffing complexity.
Potential Valuation »Under this example the homecare firm’s value decreases by 20%. From (Moderate)To (High) Revenue$2,000,000 Cash Flow$300,000 Multiple3.52.9 Discount Rate27%32% Valuation 1 $1,063,089$882,037
Next Week’s Webinar For more info and to register for this free webinar, go to: bit.ly/15VjFqY or visit the Home Care Pulse blog.bit.ly/15VjFqY
Thank you! Connect with Home Care Pulse on social media: Facebook.com/homecarepulse @HomeCarePulse Thank you, Scott! www.osbornehomecare.com